Insolvency Stay of Proceedings Does Not Stay Certification of Union

The Court of Appeal recently caused a sea change in the law of insolvency when it permitted a union to certify after the employer had come under the control of a receiver in Romspen Investment Corporation v. Courtice Auto Wreckers Limited.1 The significance of the Court’s decision is well reflected in the words of Justice Lauwers who dissented from the majority opinion:

The effort in this case to certify the union after the receiver’s appointment represents a new front in the “battle” the authors describe between employees and other creditors of an insolvent business, and requires careful scrutiny. Even if the effect is limited in this particular case because some of the other units in the debtor’s business are unionized already, my colleague’s decision would be a critical precedent of broader application. It is necessary to step back and consider the larger context.2

The case arose when six employees of Courtice Auto Wreckers Limited (“Courtice”), one of a group of companies that had been put under receivership, applied to have a union certified with the Ontario Labour Relations Board (the “OLRB”). Two days after the application, the receiver dismissed four of the six employees and retained new individuals to do the same jobs, citing legitimate business reasons. The OLRB concurrently stayed the union’s application for certification on the basis of the stay of proceedings that had been made when Courtice had gone into receivership. The union filed an unfair labour practice complaint with the OLRB concerning the dismissals. It then brought an application to Court seeking to lift the stay to proceed with both its application for certification and the complaint.

The motion judge denied the union’s request and so the union appealed.

The Majority Focuses on Union Rights

The principal issue that split the majority and dissenting opinions was whether employees’ rights to organize should trump the rights of creditors to the largest realization possible on the debtor’s assets. Whether to lift a stay is based on the totality of the circumstances and the relative prejudice to both sides. The majority viewed the prejudice of union certification to the creditors as merely speculative, while the prejudice to the employees of denying the application had become manifest, when the receiver had dismissed a majority of them shortly after they filed their application to certify.

The motion judge had given four reasons for denying to lift the stay:

The certification of the union would increase the rights of the workers relative to other creditors, contrary to the purpose of the stay, which was to freeze all of the rights and remedies of all creditors as at the date of receivership;

Recognition of the new bargaining unit could detrimentally affect the sale price of the business where the proposed union worked, which was unfair to other creditors who had their rights frozen;

The fact that there may be purchasers willing to accept the union is irrelevant, as the workers could simply pursue certification following the sale of the business; and

There was no guarantee that certification would be meaningful following the sale, as it was unclear what form a sale of Courtice’s business would take.

The majority down played the potential prejudice to the creditors generally. In its view, certification did not automatically afford the workers any additional rights as creditors of Courtice, and it was unknown whether the union would be able to negotiate a more financially favourable contract. With respect to the sale of the business, the majority noted that there was no evidence that certification would detrimentally affect the sale price. The majority held that there could be purchasers that would find a set collective agreement attractive with its certainty of terms.

With respect to the workers, the majority found that the indefinite delay of their rights to organize constituted real prejudice. This prejudice was particularly acute where some of the employees had been terminated allegedly for exercising their rights to pursue certification.

Finally, the majority found the motion judge’s determination that there was no guarantee that the union would be meaningful following the sale as completely speculative. As matters stood currently, the workers had a statutory right to unionize and the bar to that right caused by the stay was prejudicial. The prejudice to Courtice was minimal, as the certification of the union was fairly straightforward, and the majority simply did not accept that unionization would negatively affect the sale process of the business.

Accordingly, the majority allowed the appeal and lifted the stay. The workers were permitted to proceed both with the certification and their complaint.

The Dissent Focuses on the Battle Between Workers and the Other Creditors

Unlike the majority, the dissent approached the issue by weighing the principles underlying the insolvency regime against those underlying the Labour Relations Act, 1995, S.O. 1995, c. 1, Sched. A (“LRA”). The workers had argued that the Supreme Court of Canada’s recent labour trilogy,3 which afforded constitutional protection to the collective bargaining rights, meant that the right to certify should trump the regime provided by the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”). The dissent, however, found that the workers had failed to properly develop and raise this argument, and it is noteworthy that the argument had gone unaddressed by the majority. Accordingly, the dissent applied the paramountcy doctrine, and looked to see whether there existed a conflict between the provincial LRA and the federal BIA, either operationally or in principle.

The dissent identified four principles underlying the insolvency regime: (1) creditors of the same class, including employees, are to be treated equally (the “pari passu principle”); (2) the date on which respective rights of creditors are to be determined is the date of bankruptcy, appointment of the receiver, or the making of an order under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 ("CCCA"); (3) the administration of the debtor’s assets is to be orderly; and (4) the stay is part of the process of managing the expectations of the parties. In the dissent’s view, permitting the certification to go forward would bring the LRA into conflict with the BIA.

First, allowing the workers to certify would conflict with the pari passu principle because it would increase the workers’ right. The dissent disagreed that this was speculation, as it was obvious that the workers would not be pursuing certification if it did not grant them additional rights in the receivership. Second, the dissent saw the motion judge’s conclusion that certification could negatively impact the sale of the business as self-evidently true. If certification proceeded, a purchaser of the business would face significant additional obligations that would likely reduce the proceeds on any sale.

The dissent acknowledged that it was prejudicial to the workers to have their right to seek certification stayed by the receivership. The dissent, however, saw it as significant that the workers had not bothered to pursue certification prior to the receivership. In such circumstances, to permit the certification after-the-fact would violate the important principles underlying the insolvency regime.

Impact of the Decision

Going forward, it can be expected that workers of an insolvent company will try to certify to enhance their bargaining power in the insolvency and to afford additional protection if the business is sold as a going concern. This may certainly tip the balance of power in favour of workers in an insolvency, which was the concern of the dissent. In addition, it can add a further cost to the insolvency process.

For creditors seeking to uphold the stay of proceedings, one important lesson of this decision is the need to raise more substantive evidence demonstrating prejudice. Further, while it would be expected that the result in this decision would equally follow in a CCAA proceeding, it is of note that in Essar Steel Algoma Inc. (Re),4 the Superior Court approved an alternative grievance process to that provided in a collective agreement because it would facilitate the restructuring. The Court did find a conflict between the CCAA and the LRA, and concluded that the CCAA trumped pursuant to the doctrine of paramountcy.

Lerners LLP Toronto Office

How Can We Help You?

Name:*

Email:*

Office:*

Message:*

WARNING: PLEASE READ BEFORE SENDING ANY EMAIL

We look forward to speaking to you. However, before we can assist you, we must first ensure that we do not have a conflict of interest. Accordingly, unless you are currently a client of Lerners LLP, we ask that you do not include any confidential information in this email. Please note that by sending this email, you will not automatically become a client of Lerners LLP unless and until Lerners LLP confirms that it will agree to be retained on your matter.